Larger employers that don’t offer minimum essential health coverage to full-time workers may face penalties under health care reform if any full-time employees receive a government premium credit or subsidy to buy their own insurance through an exchange.

The so-called employer mandate and the health insurance exchanges both go into effect in 2014 under the Patient Protection and Affordable Care Act.

The penalties generally apply to all employers with 50 or more full-time equivalent employees. An employer with at least 50 FTEs that provides access to coverage but fails to meet certain requirements, outlined below, may also be subject to a penalty.

Minimum essential coverage generally includes any coverage offered in the small or large group markets. Excepted benefits, such as limited-scope dental or vision offered under a separate policy, certificate or contract of insurance and Medicare supplemental plans, do not qualify.

Penalties explained

Starting in 2014, large employers that don’t offer coverage face a penalty of $2,000 per full-time employee (excluding the first 30) if at least one FTE receives a government subsidy to buy coverage on an exchange. This is sometimes referred to as the "play or pay" penalty.

Employers that offer coverage to employees may still face a "free rider" penalty if the coverage offered is deemed unaffordable or low in value.

If an employer offers coverage, but a full-time employee receives a premium credit subsidy through an exchange, the employer must pay an assessment equal to the lesser of:

$3,000 for each employee that receives a subsidy

$2,000 for each full-time employee after the first 30

The monetary penalties listed above are annual figures and may be pro-rated to the number of months for which the penalty applies.

Who’s eligible for a subsidy?

Employees who are offered coverage from their employer could be eligible for subsidies on the exchange if they don’t qualify for Medicaid or other programs, are not enrolled in their employer’s coverage and meet either of the following conditions:

The employee’s share of the premium exceeds 9.5 percent of their household income

The plan pays for less than 60 percent on average of covered health care expenses (e.g. coverage offered does not have at least a 60 percent actuarial value).

After 2014, penalty amounts are indexed by a premium adjustment percentage for the calendar year.

However, the IRS has signaled it would be making the 2014 employer "play or pay" compliance requirement easier for employers.

Responding to concerns that employers will have difficulty knowing the household incomes of their employees, the IRS has indicated that under guidance to be issued later this year, employers would not be liable for a penalty if the cost of self-only coverage does not exceed 9.5 percent of the employee’s current W-2 wages from the employer — even if the employee must pay more than that for dependent coverage.

The Congressional Budget Office expects the penalties to generate $52 billion toward the overall cost of health reform by 2019.

The information on this website is based on BCBSM's review of the national health care reform legislation and is not intended to impart legal advice. Interpretations of the reform legislation vary, and efforts will be made to present and update accurate information. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. Analysis is ongoing and additional guidance is also anticipated from the Department of Health and Human Services. Additionally, some reform regulations may differ for particular members enrolled in certain programs such as the Federal Employee Program, and those members are encouraged to consult with their benefit administrators for specific details.